UK Economy Contracts by 0.1% in October, Defying Expectations

The UK economy has unexpectedly contracted by 0.1% in October, according to data from the Office for National Statistics (ONS). This decline comes as a surprise, as economists had anticipated a growth of 0.1%. Additionally, the economy experienced a 0.1% contraction over the preceding three months.

Impact of Cyber-Attack and Budget Uncertainty

A cyber-attack on Jaguar Land Rover has significantly disrupted vehicle production. While there was a minor recovery in October, it was insufficient to offset prior losses. Analysts attribute the ongoing uncertainty related to the Budget for contributing to sluggish consumer and business spending.

Interest Rate Implications

The weaker economic performance may lead to a reduction in interest rates by the Bank of England at its upcoming meeting. Ruth Gregory, a deputy chief UK economist at Capital Economics, stated that this contraction strengthens the case for a rate cut, noting that growth has occurred only once in the last seven months.

Key Economic Insights

• Production output decreased by 0.5% over the three months leading to October.
• Vehicle manufacturing fell by 17.7% during the same period.
• October saw a slight 1.1% growth in production output, largely due to the limited recovery in vehicle manufacturing.

Despite the uptick in production in October, it remains below the levels registered in August. The services sector, making up approximately 75% of the economy, did not show any growth over the three months leading to October.

Reactions to the Economic Report

Shadow chancellor Sir Mel Stride critiqued the Budget, suggesting it directly caused the economic contraction. He accused the government of mismanagement regarding tax promises and public finances. Meanwhile, economists from firms like Barclays and JP Morgan have commented on the growing unpredictability causing hesitance in spending.

• Scott Gardner from JP Morgan noted that Budget speculation has dampened consumer and business confidence.
• Card Factory has reported lower sales and revised its profit forecasts due to consumer pressures.

Future Economic Outlook

Fergus Jimenez-England from the National Institute of Economic and Social Research highlighted that while improvements to financial buffers from the Budget could reduce uncertainty, their impact on economic activity remains to be seen. Meanwhile, KPMG UK’s chief economist Yael Selfin remains optimistic, citing that investments from both the private sector and the government may support economic growth into 2026.